Safaricom stands to be the biggest loser should the Government implement the controversial proposal to turn till and paybill numbers into electronic tax registers.
The two platforms, hailed as ground-breaking innovations when they were first unveiled, have attracted hundreds of thousands of core users — mostly small businesses — by offering them an alternative to cash payments. Both are convenient and easy to use and eliminate the risk of theft and fraud, which were rife when businesses were only accepting cash payments.
Because they offered a solution that the market badly needed, the uptake was quick and this, in turn, helped to drive new revenue streams for Safaricom. And though it remains the most profitable company in Kenya, it has in recent months come under increasing pressure to maintain its pole position.
Part of the challenge has been a slowdown in its traditional revenue sources, such as data, SMS and voice and, more recently, the entry into the market of Starlink, the US company that is offering terrestrial broadband to retail consumers.
Ever since Starlink entered the market, much to the chagrin of Safaricom management honchos, the company has been bending over backwards to retain its customers. It has, for instance, been offering a discount for home fibre subscribers who pay three months upfront. The end game of the offer is to keep unsure customers tied to the product as the company buys time to figure out how it will respond to the disruption.
Should the Government introduce the new tax as it has proposed to do come December 25, Safaricom can expect a drastic reduction in the volume and value of transactions it handles.
According to its data, Safaricom processes 2,600 transactions every second through its mobile money platform, M-Pesa. That translates to more than 21 billion transactions annually with a value estimated at over Sh36 trillion.
Kenya’s annual Budget stands at about Sh3.1 trillion, meaning that the money that Safaricom moves through its digital platform is sufficient to sustain the Government for a decade.
M-Pesa is the mobile wallet that supports Safaricom’s tertiary services, such as paybills and till numbers, because it allows end users to make payments to various points of sale. This ecosystem has thrived because the platforms have been shielded from taxation.
This was based on the assumption that the individuals making transactions have already paid income tax on the money they are loading onto their phones and that the businesses receiving the payments have also duly paid their taxes either to county or national governments or both.
To therefore decree that the two platforms will become electronic tax registers on Christmas Day this year is likely to trigger two reactions; first it will take the joy out of Christmas for those who celebrate the day and use the platform.
This is going to have a negative impact on the Gross National Happiness, which has already taken a big hit on account of the impeachment of Deputy President Rigathi Gachagua.
However, and more importantly, the move will compel consumers and small businesses to revert to the cash economy since cash payments will not be subjected to the same tax regime as the two modes of electronic payments. That will, in turn, compel the Central Bank to ensure there are sufficient bank notes to circulate in the economy, a worry that digital payments had reduced for the banking sector regulator.
Whereas the money moved through paybills and till numbers look mouth-watering from the perspective of taxation, there is a risk that the volumes will reduce once the platforms become subject to taxation. That will mean, by extension, that the margins Safaricom earns from facilitating the payments will be dented, thus eating into both its revenues as well as profitability.
Last year, Safaricom’s after-tax profit dropped to about Sh52.4 billion, representing a 22 per cent decline in profitability. With M-Pesa being one of the biggest drivers of its profitability, a reduction in number of transactions and amounts transacted is likely to depress the company’s future earnings.
For comparison purposes, Equity Bank Group had an after-tax profit of Sh43.7 billion over the same period, indicating that over time, the gap in profitability between the two giants has been narrowing. Taxing paybills and till numbers will definitely tilt the scales in the bank’s favour.
According to Mr Moses Kuria, who is a member of the Council of Economic Advisers to the President, over two million businesses use paybills and till numbers, compared to only about 200,000 that use the formal Electronic Tax Registers (ETRs).
This large number is what the Treasury is looking at as it seeks to expand the tax bracket. Whereas subjecting them to taxation will raise revenue in the short term, it is likely to affect Safaricom’s fortunes in the medium and long term as more users revert to the cash economy.
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